As consensus opinion and polls were both expecting, Macron cruised to an easy victory over europhile Le Pen in the second round of the French Presidential elections.

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he final tally was even more lopsided than the polls were predicting, giving the centrist candidate a crushing 32-point lead over his opponent. The lack of reaction in currency markets on early Asian Monday trading right after the election confirms that this is the result that traders and investors had been expecting.

The Euro was the best performing G10 currency last week, as investors priced out the last of their concerns about a Le Pen victory. The US Dollar ended the week unchanged in trade-weighted terms, as Treasury yields rose after a strong US payroll report and an optimistic Federal Reserve statement. A notable loser was the Australian Dollar, weighed down by the fall in iron ore prices.

This week two events should prove critical for FX markets. In the US, inflation data for April will tell us whether the surprise March drop was due to temporary factors. If so, we could see a strong Dollar rebound as US rate expectations adjust upwards. Also, the Bank of England meeting on Thursday could prove supportive for Sterling if any other MPC member joins Kristin Forbes in her hawkish dissent arguing for an immediate rise in rates.

Major currencies in detail

GBP

Strong PMI business activity data supported Sterling last week, helping dissipate some of the gloom from the soft first-quarter growth data. However, this good news was not enough to clear out pessimism over the evolution of the initial Brexit talks with the European Union. In the end, the Pound finished the week nearly unchanged, hovering near the top of its post-Brexit ranges.

All eyes now turn towards the Bank of England May meeting. We expect forecast for future growth to come down slightly, while those for inflation rise. In the end, the net effect on Sterling should be minimal and the Pound will trade in response to events elsewhere, notably the key US inflation data.

EUR

With no major economic or monetary events out of the Eurozone, and traders certain of a Macron victory in the French Presidential elections, the common currency drifted upwards against all other major currencies. This week will likewise be pretty quiet. As with Sterling, the inflation number out of the US takes added importance. We note that the Euro is now trading considerably above where rate differentials across the Atlantic would justify, and is therefore vulnerable to any upward surprises from the US.

USD

A busy week from across the Atlantic generally validated our view that the modest economic slowdown seen in the first quarter of 2017 is temporary. On Wednesday, the Federal Reserve made it clear that it is looking past economic weakness in the first quarter, blaming it on transitory factors. It also mentioned that US inflation is close to target. Further, the only dissenter from the previous meeting, Kashkari, now has joined the rest of the committee, a modestly hawkish development. The clear implication is that the Federal Reserve is on track to hike rates again at the June meeting, which should prove supportive for the US Dollar. This generally hawkish message was reinforced by the strong April payroll report. Unemployment dropped 0.2%, and underemployment an even stronger 0.3%, signalling that the US economy has reached very near to a full employment. While wage data were a bit softer, we remain convinced that recent drops in unemployment will result in upward wage pressure sooner rather than later, and the Federal Reserve remains on track to hike rates in June and at least once, possibly twice more before the end of 2017.